The Role of Boards in the Transition to a Net-Zero and Climate-Resilient Economy
As companies continue to recognize climate risk as a material financial risk to their business, conversations are occurring in the boardroom regarding how to address these new risks. Investors continue to scrutinize the sustainability of business models for a low-carbon economy, connecting a company’s ability to address climate risk to long-term value creation. The board’s role of stewardship is critically important in this transition.
Increasingly, US boards acknowledge that climate change is not just about protection against downside risks. Having a well-constructed, strategic transition plan can position a company to recognize opportunities and gain a significant competitive advantage in a low-carbon economy.
Fundamentally, boards play three main roles in a company’s climate transition:
- Regulatory conformance: Oversight and governance responsibilities are central to the board’s role in ensuring that organizations fulfill regulatory requirements for all stakeholders, regulators, and the communities in which they operate. This includes holding management accountable for compliance and making sure that climate disclosures are truthful and accurate. Many boards have designated these issues to their audit committee, but oversight remains the responsibility of the full board.
- Organizational performance: The responsibility of a board is to drive sustainable performance that balances short-term gains and long-term value creation that requires investment. In the climate context, this means advising and challenging management to articulate the risks and opportunities associated with climate change, and to establish a clear business case for climate action that aligns with the organization’s philosophy for value creation and purpose.
- Sustainability and “future proofing”: Related to the other two areas, the board has a responsibility to drive management for a plan to adapt and thrive in a low-carbon economy. This goes beyond articulating a business case and requires the board’s holistic oversight over major investments, business model analysis, risk management, and cultural alignment. These are all critical to successful transition planning.
Start With Regulatory Conformance
There are three pieces of legislation that US boards must be familiar with and should ensure that their management teams are fully prepared to comply with.
1. The US Securities and Exchange Commission’s (SEC) proposed climate disclosure rule: The SEC’s proposed climate disclosure rule requires little explanation. First announced in March 2022, it has been long anticipated in the market. Underpinned by the framework of the Task Force on Climate-related Financial Disclosures (TCFD), the disclosure requirements are expected to fall under the four pillars of governance, strategy, risk management, and metrics and targets. The heightened regulatory environment has increased the urgency for climate risk assessments, adaptation, mitigation, strategy development, and the integration of risks and opportunities into the broader enterprise risk management framework for businesses.
2. California Senate Bills (SB) 253 and 261: Signed into law in October 2023, California SB 253 and 261 are recent developments that boards should be aware of. Unlike the pending SEC disclosure rule, SB 253 and 261 will apply to both publicly listed and privately held companies. Both sets of requirements will begin in 2026 and reports will be available to the public.
- SB 253 requires that businesses with an annual revenue of $1 billion or more and conducting business in California disclose scopes 1, 2, and 3 carbon emissions annually. Emissions data disclosures must be validated by an independent third-party approved by the California State Air Resources Board. The inclusion of scope 3 emissions is particularly notable, as it has been a topic of debate with the SEC’s pending disclosure rule. It is also the most onerous of the three scopes in terms of measurement and reporting. That said, there will be some relief to the timing of the scope 3 emissions disclosure.
- SB 261 requires any business with annual revenue of $500 million or more and conducting business in California to prepare a biennial climate-related financial risk report, consistent with recommendations from the TCFD. This may include the financial impact of increased compliance and insurance costs as well as the quantification of business opportunities due to climate transition efforts.
3. EU’s Corporate Sustainability Reporting Directive (CSRD): A lesser-known piece of legislation for US boards may be the Corporate Sustainability Reporting Directive (CSRD), given its European roots. CSRD will cover 50,000 EU and non-EU businesses with material operations in Europe and it will take effect as early as 2025, using 2024 data. Compared to the SEC and California regulations, CSRD is by far the most expansive reporting framework spanning environmental, social, and governance areas. More importantly, CSRD disclosure will also affect companies within the value chain of other companies doing business in Europe, meaning that most US companies will either be directly or indirectly impacted. With multiple pieces of legislation on the horizon, US companies with global operations must be ready to assess interoperability across multiple reporting frameworks.
Move From a Compliance to a Strategic Mindset
The board has a fiduciary duty to hold management accountable to a comprehensive assessment of climate-related risks and opportunities and to ensure the accuracy of disclosures. While regulatory conformance is critical, we urge boards to recognize their stewardship role in driving organizational performance and “future-proofing" organizations to adapt and thrive in a low-carbon economy.
WTW is a NACD partner, providing directors with critical and timely information, and perspectives. WTW is a financial supporter of the NACD.
Holly Teal is the North America Climate Practice leader at WTW.
Ken Kuk is a senior director of the Executive Compensation and Board Advisory at WTW.
Hannah Summers is a director of the Executive Compensation and Board Advisory and the Climate Practice at WTW.